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> Research incentives in the new tax landscape - Change from all angles

Research and development (R&D) spending provides “benefits not only to the firm undertaking the activity but also to the economy at large in the form of lower prices, improved products and access to new production technologies.”1

R&D is a long acknowledged driver of economic prosperity and competitiveness, and the prevalent view is that more private investment in R&D will yield significant social benefit.

Through R&D, we learn to do things we could not do before, or to do them differently:

More efficiently

More accurately

With fewer emissions

The spin-off benefits from R&D include:

The jobs created

The advancement of science or technology

The infrastructure that supports them

The manufacturing and services businesses that arise or benefit from the R&D

The spending in the economy of R&D employees and their families

With all the good that comes from R&D, governments around the world want the work to be done in their countries.

Attracting research to your country is a big plus

To attract the business, governments provide grants, loans, tax advantages and R&D infrastructure for companies, the work and the people who do the R&D.

International companies may find significant impacts when they add these incentives to the models they use to choose and plan where to put R&D and how best to structure the work for financial efficiency.

Shaking up the world of tax incentive mechanisms

We found that the world of tax incentive mechanisms around the world — as well as their administration and enforcement — is shifting rapidly.

Governments are actively dealing with a wide range of enormous challenges, all of which have had a growing impact over the last decade:

Deficits are on the rise globally and available funds must be targeted with precision.

Climate change is a mega trend that must be addressed.

Governments are increasingly trying to ensure that their economies are attractive and competitive from a tax perspective.

The impacts of these megatrends are many:

Countries are generally increasing and enhancing their R&D support.

The types of incentives in use differ greatly around the world, with significant changes in existence between developed and emerging economies.

As the size of the economy increases, incenting R&D generally moves from relying on grants, to a blend of policy tools that involve grants and super deductions and eventually tax credits that become part of the permanent tax policy of the country.

The financial crisis was the genesis of a wide range of new measures which governments used to tightly focus their funding on specific sectors.

Governments are demonstrating a strong focus on both attracting and keeping the spin off benefits of R&D in a country. The “patent box” or “innovation box” has arisen as a policy tool that demonstrates these characteristics.

Enforcement is on the rise, as governments try to ensure that their limited resources are targeted at the right development projects.

Companies are having to demonstrate significantly enhanced levels of rigor and process in terms of how they develop and administer their internal frameworks for managing incentives.

1 An International Comparison of Marginal Effective Tax Rates on Investment in R&D by Large Firms; John Lester, Andre Patry, Donald Adea, Working paper 2007-07 September 2007, Department of Finance, Canada. Page 1.

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